Respondents Brief — Paulsen v. Commissioner
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| Supreme Court, U.S.
FILED
OCTOBER TERM, 1984
HAROLD T. PAULSEN, ET UX., PETITIONERS
Vv.
COMMISSIONER OF INTERNAL REVENUE
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
BRIEF FOR THE RESPONDENT
Rex E. LZe
Solicitor General
RoGER M. OLSEN
Acting Assistant Attorney General
ALBERT G. LAUBER, JR.
Assistant to the Solicitor General
ERNEST J. BROWN
KENNETH L. GREENE
Attorneys
Department of Justice
Washington, D.C. 20530
(202) 633-2217
BEST AVAILABLE COPY
QUESTION PRESENTED
Whether a taxpayer qualifies for nonrecognition of
realized gain under Section 354(a)(1) of the Inter-
nal Revenue Code when, upon the merger of a stock
savings and loan association into a mutual savings
and loan association, he surrenders his stock in the
former and receives a passbook savings account and
short-term certificates of deposit in the latter.
(1)
TABLE OF CONTENTS
Page
es seemsnrenesnnenoneoensnenses 1
TE 1
a. sesssusneserannsccsoree 2
A 2
Summary of argument 2... ................220.0-0ccccccceeeeeeees 7
Argument:
The court of appeals correctly held that the gain
petitioners realized was to be currently recognized
in their 1976 taxable year 0... 11
A. The transaction in which petitioners surren-
dered stock in Commerce and received a pass-
book savings account and certificates of deposit
in Citizens was not a reorganization, but a sale.. 13
B. Even if the merger of Commerce into Citizens
was a “reorganization,” petitioners must recog-
nize gain up to the fair market value of the
non-equity interests that they received .......... 36
C. Denial of “reorganization” treatment in this
case is supported by sound considerations of
tax policy, and there are no countervailing
factors in petitioners’ favor 42
ET 47
LL la
TABLE OF AUTHORITIES
Cases:
Capital Savings & Loan Ass’n v. United States,
Sr 5-6, 33, 36, 38, 42, 44
Civic Center Finance Co. v. Kuhl, 83 F. Supp. 251,
Ee 28
Commissioner V. Gilmore’s Estate, 130 F.2d 791... 12
(1m)
IV
Cases—Continued : Page
Cortland Specialty Co. v. Commissioner, 60 F.2d
TIT. snsicesincietihniniemieniadtiimres i euiiadieeiaenataltainaaannenetins ipiibeiodaal 18, 14
Everett v. United States, 448 F.2d 357 ................... 6
Gregory V. Helvering, 293 U.S. 465 ............... 24
Helvering Vv. Minnesota Tea Co., 296 U.S. 378 ...... passim
Home Savings & Loan Ass’n V. United States, 514
F.2d 1199, cert. denied, 423 U.S. 1015 6, 45
John A. Nelson Co. Vv. Helvering, 296 U.S. 374... 16, 34
Kass v. Commissioner, 60 T.C. 218 16
LeTulle v. Scofield, 308 U.S. 415 ..........................5, 14, 15
Pinellas Ice & Cold Storage Co. Vv. Commissioner,
-£. FF eee eee 5, 14, 15, 16, 44
Porter v. Aetna Casualty Co., 370 U.S. 159 eon 18
Roebling v. Commissioner, 148 F.2d 810, cert. de-
<a 15
Society for Savings Vv. Bowers, 349 U. S. 148 ......... 9
Southwest Natural Gas Co. v. Commissioner, 189
F.2d 382, cert. denied, 342 U.S. 860 ..............12, 15, 16
Tcherepnin V. Knight, 389 U.S. 3382 ....................... 18
West Side Federal Savings & Loan Ass'n Vv. United
ee, Se , eemeonensnnvonianel 6, 33, 37
Wisconsin Bankers Ass’n V. Robertson, 294 F.2d
714, cert. denied, 368 U.S. 938 __...... eee 23, 24
Yoe Heating Corp. v. Commissioner, 61 T.C. 168.. 16
York v. Federal Home Loan Bank Board, 624 F.2d
495, cert. denied, 449 U.S. 1043 . 0... 30, 46
Statutes and regulations:
Crude Oil Windfall Profits Tax Act of 1980, Pub.
L. No. 96-223, § 404(a), 94 Stat. 305 21
Home Owners Loan Act of 1933, ch. 64, 48 Stat.
128 et seq.:
§ 5, 48 Stat. 132, 12 U.S.C. 1464 ............ ini 2
§ 5(b), 48 Stat. 132, 12 U.S.C. 1464(b)....2, 3, 24, 25
§5(b) (1) (A), 48 Stat. 132, 12 U.S.C. 1464
COD CE) CA) nanan ananereennnncecnannnnsnsnesocnevenerecsscscenes 25
§ 5(b) (1) (B), 48 Stat. 132, 12 U.S.C. 1464
CD) CE) CIB) nnn annncaeeceneenecenececnsneserecwenocsensescoess 25
§ 5(b) (1) (E), 48 Stat. 132, 12 U.S.C. 1464
(b) (1) (E) ..... ~seseccseecesesersncesnsesssassncensseesessenees 24, 25
Vv
Statutes and regulations—Continued : Page
§$ 5(c), 48 Stat. 132, 12 U.S.C. 1464(c) ..... 24
§5(h), 48 Stat. 183, 12 U.S.C. (1946 ed.)
1464(h) ........ REELS SEN OF PORE NT ee SD. oS 18
Housing and Urban enn nt Act of 1968,
Pub. L. No. 90-448, 82 Stat. 476 et seq.:
§$1716(a), 82Stat.608 Te a Rie ne 24
§ 1716(b), 82Stat.608 24
Internal Revenue Code of 1939, ch. 2, 53 Stat. 1
et seq.:
I i cantebvaeien 20
§ 101(2), 68 Stat.38 2... 18
§$ 101(4),53Stat.338 18
§104(a),53Stat.36 , a 21
Internal Revenue Code of 1954 (26 U U.S.C. *
$116. Tae OAR eRe
$116(a) (68A Stat. 37) . a ial a le i
i py ae placa Bee 21
REE RS SRO Sea ada de 21, 31, la
§ 116(c) (1) (A) ......... ta ical ieee aA 21
I a el ae a 21
REE RAN P E ee aoe 22
eta eae i ai aa eae oe oe 42
aE FRE AR REY Le Ne HN 22
IEA Re aR A ne. BMS Be ee Ni 43
EE EE as cee ee ey Pa 22
ESE een ee eee 22
ES Re OE Re ORE ae 23
a 23
ES Se aera ee aan 10, 36, 37, 38, la
a inieatnaslenieaiammenia te 7,11
I a els tlll 2, 4, 7, 11, 36, la
TL ..........4, 8, 10, 11, 40, 2a
§ 354(a) (2) (B) ........... heennnicittidiasteniuaiaaae 12, 36, 2a
ASS postnatal 2, 10, 11, 36, 37, 38, 2a
§356(a) (1) 20... 5, 8, 10, 12, 36, 40, 41, 2a
I ieee lee 5, 2a
ISRO te cone 8, 10, 12, 36, 2a
§ 356 (d) (2) een. Cee -+0- 8, 10, 12, 36, 3a
VI
Statutes and regulations—Continued : Page
§ B56 (d) (2) (CB) 2... neers 12, 36, 40, 3a
§ BEB (a) (1) ....n2..2..-.ceecenneencenceeenceeceencsensnssenseees 42
BBB R) CB) onscenccennceeccceccoccccoreccsesecccsnssrnsassnscscoess 42
| 14, 41
——— 41
ID enecccccseceneccecescscsnecsecscnsescssenssoncessccsneonenenes 27
DATED. nccunccsssessnassncsenensnessessssenacsssnnpeepeconienensessnees 42
ee 2, 4a
ER CEE) onceccencccecscecessecccscccccccossconoscnsonses 2, 4a
§ BEB(a) (1) (CB) -.2.222.222200-eeseerrceeeereevereneceesssnees 40
§ BEB(W) (1) (CO) 222200202000. ecccrrecoreesenecccsceccssseeess 40
TAMER. ccccedannsomnedcnsncantnceseninesesensanasacaseesenenuninsh 21
TAM Sckccasennsansdatenmemcummesemeninntnbehutsensensnsmmisndstenee 2,4
ae oe Ye 2,4
... 2, 4a
ITI iia esitanistetsnadaiietacsicinnciveearengitid 2, 21, 22, 31, 43, 4a
SII oisossdacieinadaiiatetadutatientenseenmpngnncccsenasennent ssileiaiaseaieies 2, 5a
SII :ceintensinctepassngenscnncnsenenstnctectennesusti 22, 26, 43, 5a
§ 593(f) (1964 ed.) ........ nia acetate ace 22
SEMIN, 0s acsstinctnnnanensvacsnsnatnbossseeboesansmonssants 11
EY Se ELST CRORE a SE roe Sear 2, 11, 6a
§ 1002 (1970 ed.) 0... ROE SES Sea ave Sigs. 7
SUTIN’ sochinsbadeapenqessensqesespeadanennqnanenes sieleieeibalibiall 26, 6a
STIS - : dcssasesnassseunssaspencmmenvanest ileal eee? 26
STII. inci ctenicsenmsesmneupsunsconnsetotnennnsiensinett 26
SUITED . nccstertennscrepepnesco-excenseccetest 2, 22, 25, 26, 6a
§ 7701(a) (19) (1958 ed.) 0. 22
INI -nncsccctizensnnssensenennccsisssasscssersnees 25, 6a
Revenue Act of 1926, ch. 27, 44 Stat. 9 et seq.:
§ 208 (b) (8), 44 Stat. 12 2... eee eee 14
§ 208(h) (1), 44 Stat. 14 .......... chesietialecitiadindiiialiaias 14
Revenue Act of 1951, ch. 521, 65 Stat. 452 et seq. :
§ 318 (a), 65 Stat. 490 222. 20
§ $18(b), 66 Stat. 490 2.2... eee 20
§ 313(c), 65 Stat.490 2... ba Pee. 20
$ $18(f), G5 Stat. 492 nn... ceceeeeeeeee es 20
8 SIB(h), GB Beat. G01 ................222022200222000020000022- 21
§318(i), 65 Stat. 491 (added § 3797(a)
| ) 21
VII
Statutes and regulations—Continued : Page
Revenue Act of 1962, Pub. L. No. 87-834, 76 Stat.
960 et seq.:
§ 6(a), 76 Stat. 977-982 ee ee 22
§ 6(c), 76 Stat. 982-9838 0 22
NS ee 22
Tax Reform Act of 1969, Pub. L. No. 91-172, 83
Stat. 487 et seq.:
§ 482(b), 83 Stat.622 20000. 45
§ 482(c), 8B Stat.622 ee. 25
Tax Reform Act of 1976, Pub. L. No. 94-455, 90
Stat. 487 et seq.:
§ 1901 (a) (121), 90 Stat.1784 ss 11
§ 1901 (b) (28) (B) (i), 90 Stat. 1799 sss 11
Thrift Institutions Restructuring Act of 1982, Pub.
L. No. 97-320, § 301, 96 Stat. 1469 ....———sss—s—CS 25
Pub. L. No. 93-100, § 4, 87 Stat. 343, 12 U.S.C.
RESETS RR IES ee Md eo 46
Ea RE a TT 34
88 U.S.C. 8101(a) 0. ha Saat 18
12C.F.R.:
Section 552.1 (1976) 0000. FE ohne 46
I i 46
Treas. Reg. 86, art. 112(g¢) (2) (1935) __. alae 15
Treas. Reg. :
§ 1.868-1(b) 2. iidiadadiensaliadisiadelices 7, 11, 18, 15
ESSE Nee see ees aee AT. 15
I i 7,12
Miscellaneous :
B. Bittker & J. Eustice, Federal Income Taxation
of Corporations and Shareholders (4th ed.
ae ee 12, 13, 16, 37, 40
40 Fed. Reg. 20945 (1975) 0 46
H.R. Conf. Rep. 1179, 82d Cong., 1st Sess. (1951). 20
H.R. Conf. Rep. 1213, 82d Cong., Ist Sess. (1951). 20
H.R. Conf. Rep. 2508, 87th Cong., 2d Sess. (1962) .. 22
Misceilaneous—Continued : Page §u the Supreme Court of the United States
H.R. Conf. Rep. 1785, 90th Cong., 2d Sess. (1968). 24
HLR. * <p. 1447, 87th Cong., 2d Sess. (1962) 22, 23 OCTOBER TERM, 1984 ,
H.R. }.2p. 1585, 90th Cong., 2d Sess. (1968) ........... 24
IRS, I. structions for Preparing Form 1940
a i 31
IRS, Instructions for Form 1096 (Annual Sum- No. 83-832
mary and Transmittal of U.S. Information Re-
turns) and Forms 1099-ASC, 1099-B, 1099-DIV, HAROLD T. PAULSEN, ET UX., PETITIONERS
1099-G, 1099-INT, 1099-MISC, 1099-OID, 1099-
PATR, and 5498 (1984) ee 31 v.
IRS, Publication No. 17, Your Federal Income Tax
(1977) no ennnnnvennnnnnneeecncecnseccenneececcnneennneeeeennec 31 COMMISSIONER OF INTERNAL REVENUE
LT. 4045, 1951-1 C.B.34... 31
Rev. Proc. 77-37, 1977-2 C.B. 568 16
Rev. Rul. 54-624, 1954-2C.B.16 31
Rev. Rul. 61-18, 1961-1 C.B. 5... nnnnon 40 ON WRIT OF CERTIORARI TO THE
Rev. Rul. 66-224, 1966-2 C.B.114 16 UNITED STATES COURT OF APPEALS
Rev. Rul. 68-100, 1968-1 C.B.572 31 FOR THE NINTH CIRCUIT
Rev. Rul. 69-3, 1969-1C.B.108 43, 44
Rev. Rul. 69-6, 1969-1C.B.104 as! 33, 40, 43
Rev. Rul. 69-265, 1969-1C.B.109 Paes 39
Rev. Rul. 69-646, 1969-2C.B.54 43
Rev. Rul. 70-108, 1970-1C.B.78 40 BRIEF FOR THE RESPONDENT
Rev. Rul. 72-621, 1972-2C.B.651.... ss —t—<i«
Rev. Rul. 80-284, 1980-2C.B.117 16
Rev. Rul. 80-285, 1980-20.B.119 16
S. Rep. 781 (Pt. 1), 82d Cong., Ist Sess. (1951). 19, 20 OPINIONS BELOW
S. Rep. 1881, 87th Cong., 2d Sess. (1962) ............. 22, 23 The opinion of the court of appeals (Pet. App. 20-
S. Rep. 91-552, 91st Cong., 1st Sess. (1969) —......... 45 32) is reported at 716 F.2d 563. The opinion of the
ny Court (Pet. App. 1-18) is reported at 78 T.C.
JURISDICTION
The judgment of the court of appeals (Pet. App.
33) was entered on August 16, 1983. The petition
for a writ of certiorari was filed on November 14,
1983, and was granted on February 21, 1984. The
jurisdiction of this Court is invoked under 28 U.S.C.
1254(1).
(1)
2
STATUTES INVOLVED
The relevant portions of 12 U.S.C. 1464 and of
Sections 116, 354, 356, 368, 581, 591, 593, 1002, and
7701(a)(19) of the Internal Revenue Code of 1954
(26 U.S.C.), as in effect for the tax year at issue, are
set out in a statutory appendix (App., infra, la-
lla).
' STATEMENT
1. Petitioners were shareholders of Commerce
Savings and Loan Association (Commerce). a state-
chartered, stock institution that offered various classes
of savings accounts to the public. On June 30,
1976, petitioners owned 17,459 shares of Commerce
stock with a tax basis, or cost, of about $57,000. Pe-
titioners’ shares (called “guaranty stock”) had all
the features normally associated with common stock
issued by a corporation. Pet. App. 2-3, 20-21; see
J.A. 27-28.
Citizens Federal Savings and Loan Association
(Citizens) is a federally-chartered, mutual institu-
tion that offers various classes of savings accounts to
the public. As a mutual institution, Citizens has no
capital stock. Each borrower is entitled to one vote,
and each savings account holder is entitled to one
vote for every $100 (or fraction thereof) on deposit
(Pet. App. 3-4, 21). Regardless of the amount he
has on deposit, no account holder is entitled to more
than 400 votes (id. at 21). Citizens’ articles and by-
laws provide that its net earnings are to be distrib-
uted semi-annually to savings account holders on a
pro rata basis (J.A. 43-44). In practice, however, it
pays a fixed, preannounced rate on all accounts (Pet.
App. 27). Citizens must honor requests for with-
drawals from savings accounts within 30 days of the
request (id. at 4). It may redeem all or any part of
its accounts at a price equivalent to “the full value
thereof, as determined by the board of directors”
(J.A. 42). In practice, however, the redemption
price is the outstanding balance in the account (Pet.
App. 21-22; J.A. 42). In the event of liquidation,
dissolution, or winding up, all account holders are
“entitled to equal distribution of assets pro rata to
the value of their savings accounts” (Pet. App. 4-5,
21-22).
On July 1, 1976, Commerce was merged into Citi-
zens. Under the merger plan, Commerce stockholders
were to receive a $12 deposit in a Citizens passbook
savings account for each share of Commerce stock
they owned. Alternatively, they could surrender their
stock for Citizens certificates of deposit (CDs) of
various maturities.’
Pursuant to the merger, petitioners surrendered
their 17,459 shares of Commerce stock for a Citizens
passbook savings account and short-term CDs with an
aggregate face amount and value of about $210,000.’
‘The CDs had maturities ranging from one to ten years
(J.A. 17). Deposits in passbook savings accounts issued in
the merger could not be withdrawn for one year (ibid.), but
each former Commerce stockholder was given preferential bor-
rowing privileges against those deposits (Pet. App. 5, 22).
? The exact breakdown of the consideration petitioners re-
ceived (Pet. App. 6) was as follows:
Num- Date
ber of Consideration
of Acqui- Cost Received Gain
Shares sition Basis Amount Type Realized
3.358 12/31/71 7,500 40,296 18mos.cert. 32.796
3.358 10/24/72 7,500 40,296 18mos.cert. 32.796
667 1/1/73 7,530 8.004 1 yr. cert. 474
1,971 2/19/74 6,000 23,652 3 yr. cert. 17,652
861 6/30/76 7,500 10,332 3 yr. cert. 2,832
529 6/30/76 5,772 6,348 4 yr. cert. 576
17,459 $56,802 $209,508 $152,706
4
They thus realized a gain of $153,000. Petitioners
did not report this gain as income on their 1976 fed-
eral income tax return. Instead, they took the posi-
tion that the transaction was a corporate “reorgani-
zation” and that the realized gain, accordingly, should
not be currently recognized. Section 368(a) (1) (A)
of the Code* defines “reorganization” to include “a
statutory merger.” Section 354(a) (1) generally pro-
vides that, in the case of two corporations participat-
ing in a reorganization, “[n]o gain or loss shall be
recognized” to a shareholder whose stock in one is,
pursuant to the plan of reorganization, exchanged
solely for stock in the other. Petitioners contended
that the Citizens savings accounts they received in
the merger were “stock,” since Citizens was a mutual
institution, and since those accounts theoretically rep-
resented ownership interests in it.
2. On audit, the Commissioner determined that
the merger was not a tax-free reorganization, and
that petitioners were required to recognize their
$153,000 gain immediately (Pet. App. 6; J.A. 8-13).*
His determination was premised on the well-established
principle that a transaction qualifies as an exchange
pursuant to a “reorganization” only if it is not, in
substance, a sale. In order to constitute a reorgani-
8 Unless otherwise noted, all statutory references are to the
Internal Revenue Code of 1954 (26 U.S.C.), as in effect for
the tax year at issue (the Code or I.R.C.).
*The Commissioner proposed to accord long-term capital
gain treatment to $149,000 of petitioners’ gain. He proposed
to accord short-term treatment to the balance, on the ground
that petitioners, in surrendering their stock, had engaged in
an early disposition of 1,390 shares that they had acquired
pursuant to stock options on the eve of the merger. See I.R.C.
§§ 421, 422: J.A. 11-12, 15.
5
vation exchange rather than a sale, the transaction
must evince a “continuity of proprietary interest.”
Pinellas Ice & Cold Storage Co. v. Commissioner, 287
U.S. 462 (1933); LeTulle v. Scofield, 308 U.S. 415
(1940). The ownership interest that the old corpora-
tion’s shareholders acquire in the new corporation,
moreover, must be “definite and material” and must
“represent a substantial part of the value of the
thing transferved.” Helvering v. Minnesota Tea Co.,
296 U.S. 378, 385 (1935).
The Commissioner determined that petitioners ac-
quired no meaningful ownership interest in Citizens
when they received the CDs and passbook savings ac-
count. He viewed those dollar obligations as constitut-
ing, not “stock” but a “hybrid interest, representing
debt which is the equivalent of cash while, at the
same time, having certain equity features” (Pet.
App. 10). The Commissioner concluded that the ac-
counts’ equity features had minimal value, that their
value did not “represent a substantial part of the
value” (Minnesota Tea, 296 U.S. at 385) of the Com-
merce stock petitioners gave up, that petitioners in
essence had become creditors of Citizens, and that the
transaction wis thus a sale. Alternatively, the Com-
missioner contended (J.A. 11-13) that, even if peti-
tioners’ ownership interest was sufficient to enable
the transaction to qualify as a “reorganization,” the
dollar obligations they received in exchange for their
stock represented, not “stock,” but some combination
of “securities,” “money,” and “other property,” and
that petitioners’ gain had to be recognized up to the
value of those non-equity interests. See I.R.C.
§§ 354 (a) (2), 356(a) (1) and (d).
3. Petitioners sought redetermiation of the result-
ing deficiency in the Tax Court. Following Capital
Savings & Loan Ass’n v. United States, 607 F.2d 970
6
(Ct. Cl. 1979), West Side Federal Savings & Loan
Ass’n v. United States, 494 F.2d 404 (6th Cir. 1974),
and Everett v. United States, 448 F.2d 357 (10th
Cir. 1971), the Tax Court held that the passbook sav-
ings account and CDs received by petitioners satis-
fied the “continuity of proprietary interest” test and
that the transaction was, accordingly, a tax-free re-
organization (Pet. App. 10-17). The Tax Court also
rejected the Commissioner’s alternative contention,
concluding that “the cash deposit and proprietary
rights represented by [the savings] accounts [were]
not separable,” that their proprietary rights rendered
them “stock,” and that the accounts thus necessarily
could not be “securities,” “money,” or “other prop-
erty” as the Commissioner urged (id. at 17-18 n.25).
The court acknowledged that the Commissioner was
“not without arguments” and that “treating savings
accounts as ‘stock’ * * * raises a number of logical
and practical administrative problems” (id. at 15-16
& n.22). But while the court suggested that it would
have “give[n] greater weight to those problems in
reaching [its] decision” if the question were one of
first impression, it “fe[It] constrained to follow the
guidance” of the three appellate decisions cited above
(id. at 16).
The court of appeals unanimously reversed (Pet.
App. 20-32), following its earlier decision in Home
Savings & Loan Ass'n vy. United States, 514 F.2d
1199 (9th Cir.), cert. denied, 423 U.S. 1015 (1975).
The court acknowledged that the CDs and passbook
savings accounts carried with them certain proprie-
tary features, but concluded that their debt features
“overwhelmingly predominate[d]” (Pet. App. 24),
that they were “in reality indistinguishable from or-
dinary savings accounts” (id. at 30-31), and that
they were “essentially the equivalent of cash” (id. at
31). Because the accounts, “though * * * ownership
interests for some purposes, [did] not ‘partake suffi-
ciently of equity characteristics’ to qualify [the]
transaction as a tax free reorganization” (Pet. App.
32), the court held that petitioners in essence had
sold their stock and were thus required to recognize
their gain at once.
SUMMARY OF ARGUMENT
The Internal Revenue Code generally provides that
“on the sale or exchange of property the entire
amount of the gain or loss * * * shall be recognized”
(26 U.S.C. (1970 ed.) 1002). Sections 354 to 368
set forth exceptions to this rule in the case of certain
“exchanges” incident to a corporate “reorganiza-
tion.” These provisions allow parties exchanging
property in a merger or similar transaction to avoid
current recognition of gain or loss, provided that the
transaction represents “only a readjustment of con-
tinuing interest{s}] in property under modified cor-
porate forms” (Treas. Reg. § 1.368-1(b)). The “re-
organization” provisions presuppose that the inves-
tor’s new property “is substantially a continuation of
[his] old investment still unliquidated” (Treas. Reg.
§ 1.1002-1(c)). If the investor liquidates or “cashes
out” his equity stake, the transaction is not a “re-
organization exchange” but a “sale,” and gain or loss
must be recognized at once.
Once a “reorganization exchange,” rather than a
“sale,” is found, the Code sets strict limits on the
kinds of consideration that can be received tax-free.
Section 354(a) (1), as relevant here, provides that a
shareholder will recognize no gain or loss if he ex-
changes stock in one corporation which is a party to
the reorganization solely for stock in another corpora-
tion which is a party to the reorganization. If, how-
ever, a shareholder surrenders only stock, and gets
back, not just “stock,” but also “securities” (gener-
ally, debt obligations), “money” or “other property,”
he must recognize his gain (if any) up to the value
of those non-equity interests (I.R.C. $§ 354(a) (2),
356(a)(1), (d)(1) and (2)). These rules imple-
ment the basic principle of “reorganization” tax law,
namely, that gain or loss must be recognized to the
extent a taxpayer liquidates, rather than continues,
his equity stake.
Here, petitioners surrendered their stock in Com-
merce for dollar obligations in Citizens. That trans-
fer was not a tax-free “reorganization exchange,” for
two distinct reasons. First, while formally structured
as a merger, the transaction was in reality a purchase
of assets by Citizens and a sale of their Commerce
stock by petitioners. Second, even if the transaction
was a “reorganization,” the consideration petitioners
received was not “stock,” but some combination of
“securities,” “money” and “other property,” accom-
panied by a nominal equity participation. To the ex-
tent of the value of the non-equity interests petition-
ers received, therefore, they must recognize their gain
in any event.
1. This Court has consistently held that a trans-
fer of corporate assets for cash or dollar obligations
is not a “reorganization exchange” but a sale. In or-
der for a merger to qualify as a “reorganization,”
the transferor’s shareholders must acquire in the
transferee company an equity interest that is “defi-
nite and material” and that “represent[s] a substan-
tial part of the value” of the total consideration they
receive (Helvering v. Minnesota Tea Co., 296 U.S.
378, 385 (1935).
9
The equity stake petitioners acquired in Citizens
did not “represent a substantial part of the value” of
what they got in the merger. What they got, after
all, were savings accounts in a federally-insured in-
stitution. Over a period of years since 1951, Congress
has increasingly assimilated mutual S&Ls and their
account holders to banks and their depositors. For
federal tax purposes, those accounts since long before
1976 have been treated exactly like bank deposits, and
the so-called “dividends” Citizens pays on those ac-
counts have been treated exactly like interest paid by
a bank.
It is true that petitioners’ savings accounts were
accompanied by certain proprietary features, viz., a
limited right to vote and a contingent right to par-
ticipate in the proceeds of a solvent liquidation. But
those rights had no substantial value. In practice,
depositors rarely exercise their voting rights and at-
tach no importance to them. And this Court has
noted that the solvent liquidation of a savings institu-
tion is “such a remote contingency” that any theoreti-
cal value of the right to participate in a liquidation
“reduces almost to the vanishing point’ (Society ”
Savings v. Bowers, 349 U.S. 143, 150 (1955) ).
viously, no one would pay anything, beyond the num-
ber of dollars on deposit, for the “equity features”
accompanying petitioners’ savings accounts, for one
could acquire those equity features for free simply by
using the same number of dollars to open an account
in one’s own name.
The value of the consideration petitioners received,
in short, was almost wholly represented by the sav-
ings accounts’ “debt features,” viz., the right to with-
draw $210,000 in cash on demand or at stated in-
tervals. Since the accounts’ equity features thus did
10
not “represent a substantial part of the value” (Min-
nesota Tea, 296 U.S. at 385) of the total considera-
tion petitioners received, the court of appeals cor-
rectly held that the merger effected, not a “reorgani-
zation exchange,” but a sale.
2. Even if petitioners’ savings accounts were suf-
ficiently imbued with equity characteristics to enable
the overall transaction to qualify as a “reorganiza-
tion,” the effects of that reorganization upon peti-
tioners would still have to be gauged by testing the
consideration they received under Sections 354 and
356. Since petitioners surrendered only stock, they
must recognize gain to the extent that they received,
not just “stock,” but “securities,” “money” or “other
property” (I.R.C. $§ 354(a) (2), 356(a) (1), (d) (1)
and (2)).
Petitioners’ savings accounts plainly do not con-
stitute “stock” pure and simple. Rather, the accounts
represent “hybrid interest[s]” (Pet. App. 10), short-
term debt obligations accompanied by nominal equity
features. There is no need in this case to decide
whether the non-equity features of the savings ac-
counts should be considered “securities,” “money” or
“other property.” Since petitioners surrendered only
“stock,” they must recognize gain to the extent they
got back anything but “stock,” regardless of how
those non-equity interests are denominated.
Here, as noted above, the nonstock rights that peti-
tioners received consisted of the right to withdraw
$210,000 in cash from Citizens. The fair market value
of that right is stipulated to be $210,000. Since the
value of the non-equity interests petitioners acquired
thus exceeds the gain they realized ($153,000), they
must recognize that gain in full. This result, of
course, is the same as the result produced by our
ll
primary submission—that the transaction was a sale
and not a “reorganization exchange”—but that merely
confirms that our primary submission is correct.
ARGUMENT
THE COURT OF APPEALS CORRECTLY HELD
THAT THE GAIN PETITIONERS REALIZED WAS
TO BE CURRENTLY RECOGNIZED IN THEIR 1976
TAXABLE YEAR
Section 1002 of the Code, effective during 1976,
stated that, “[e]xcept as otherwise provided in [sub-
title A of the Code], on the sale or exchange of prop-
erty the entire amount of the gain or loss * * * shall
be recognized.”” Among the Code sections that “other-
wise provide” are Sections 354 to 368, governing cer-
tain transactions in connection with “corporate reor-
ganizations.” Section 354(a)(1) says that “[n]Jo
gain or loss shall be recognized” if stock or securities
in a corporation which is a party to a reorganization
are “exchanged solely for stock or securities * * *
in another corporation [which is] a party to the reor-
ganization.” To qualify for nonrecognition of gain
or loss, a transaction whereby a shareholder sur-
renders stock in one of the corporations must con-
stitute, not a “sale,” but an “exchange” that estab-
lishes a continuity of his proprietary interest in the
other company. Treas. Reg. § 1.368-1(b).
Once a “reorganization exchange” is found, Sec-
tions 354(a)(2) and 356 limit the kinds of consid-
5 Effective for taxable years beginning after December 31,
1976, Congress repealed Section 1002 and reenacted its provi-
sions (with slight verbal changes) as Section 1001(c). Tax
Reform Act of 1976, Pub. L. No. 94-455, § 1901 (a) (121) and
(b) (28) (B) (i), 90 Stat. 1784, 1799.
12
eration that can be received tax-free. Section 356(a)
(1) provides that, if a taxpayer receives, besides
“stock or securities,” “other property or money,” he
must recognize gain (if any) up to “the sum of such
money and the fair market value of such other prop-
erty.” Section 354(a)(2)(B), moreover, imposes
additional restrictions where securities (generally,
debt obligations) are received “and no such securities
are surrendered.”. In such situations, the securities
received constitute “other property” (I.R.C. § 356(d)
(1) and (2)), and gain must be recognized up to the
fair market value thereof (I.R.C. $§ 354(a) (2) (B),
356(d)(2)(B)). See generally B. Bittker & J. Eus-
tice, Federal Income Taxation of Corporations and
Shareholders § 14.31, at 14-97 (4th ed. 1979) (herein-
after cited as Bittker & Eustice) (citing cases). In
short, if a shareholder participating in a “reorganiza-
tion exchange” surrenders only stock, and gets back
anything besides “stock,” he must recognize gain (if
any) up to the value of those non-equity interests.
The underlying assumption of the reorganization
provisions, as of all the Code’s tax-free exchange pro-
visions, “is that the new property is substantially a
continuation of the old investment still unliquidated.”
Treas. Reg. § 1.1002-1(c). The reorganization pro-
visions were enacted “to free from the imposition of
an income tax purely paper profits or losses wherein
there is no realization of gain or loss in the business
sense but merely recasting of the same interests in a
different form.” Southwest Natural Gas Co. v. Com-
missioner, 189 F.2d 332, 334 (5th Cir.), cert. denied,
342 U.S. 860 (1951) (quoting Commissioner v.
Gilmore’s Estate, 130 F.2d 791, 794 (3d Cir. 1942)
(original quotation marks omitted)). The principle
that a reorganization entails “only a readjustment of
13
continuing interest{s] in property under modified
corporate forms” (Treas. Reg. § 1.368-1(b)) lies “at
the heart of the nonrecognition provisions and is the
reason why gain or loss, although realized, is not rec-
ognized at the time of the exchange.” Bittker & Eus-
tice 1 14.01, at 14-4. The converse of this principle,
of course, is that a shareholder who liquidates or
“cashes out” his equity investment, whether in whole
or in part, must recognize gain at once.
Petitioners contend that their surrender of Com-
merce stock for Citizens’ savings accounts was a tax-
free reorganization exchange within the intendment
of these provisions. It was not, for two distinct rea-
sons. First, the transaction, while formally struc-
tured as a merger, was in reality a sale. Second,
even if the merger was a “reorganization,” the dol-
lar obligations petitioners received were not “stock,”
and, since they surrendered only stock, those obliga-
tions could not be received tax-free.
A. The transaction in which petitioners surrendered
stock in Commerce and received a passbook savings
account and certificates of deposit in Citizens was not
a reorganization, but a sale
This Court and others early found it necessary to
differentiate between “sales” on the one hand and
“reorganization exchanges” that will qualify to pro-
duce nonrecognition of gain on the other. The prob-
lem emerged in Cortland Specialty Co. v. Commis-
sioner, 60 F.2d 937 (2d Cir. 1932), in which a cor-
poration had transferred its assets to another cor-
poration for cash and short-term promissory notes.
The court, speaking through Judge Augustus Hand,
held the transaction “a mere sale” (60 F.2d at 937,
940), notwithstanding its literal compliance with the
14
Code’s then-existing definition of a reorganization.*
A “reorganization,” the court reasoned, “presup-
pose[s] a continuance of interest on the part of the
transferor in the properties transferred” (id. at
940). The court accordingly held that “[a] sale of
the assets of one corporation to another for cash
* * * is quite outside the objects of merger and con-
solidation statutes” (id. at 939).
This Court soon faced the same problem in Pinellas
Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462
(1933). That case likewise involved an intercorpo-
rate transfer of assets for cash and short-term notes.
Specifically approving Judge Hand’s opinion in Cort-
land Specialty, this Court held that the facts “failed
to show a ‘reorganization’ within the statutory defini-
tion” (287 U.S. at 469). “[T]he mere purchase for
money of the assets of one Company by another,” the
Court reasoned, was “beyond the evident purpose of
the [reorganization] provision, and ha[d] no real
semblance to a merger” (287 U.S. at 469, 470). “[T]o
be within the exemption,” rather, “the seller must
acquire an interest in the affairs of the purchasing
company more definite than that incident to owner-
ship of its short-term purchase-money notes” (id. at
470).
In LeTulle v. Scofield, 308 U.S. 415 (1940), the
consideration received by the transferor comprised
* A “reorganization” was then defined broadly to include “a
merger or consolidation (including the acquisition by one
corporation of * * * substantially all the properties of another
corporation).” Revenue Act of 1926, ch. 27, § 203(h) (1), 44
Stat. 14. Section 203(b) (3) of the 1926 Revenue Act, 44 Stat.
12, the predecessor of Section 361 of the 1954 Code, pro-
vided for nonrecognition of gain to a corporate party to a
reorganization upon the exchange of property solely for stock
or securities in another corporate party to the reorganization.
15
cash and long-term bonds. The Court recited its ear-
lier holdings that, “where the consideration copsists
of cash and short term notes, the transfer * * * is
a sale upon which gain or loss must be reckoned,”
and went on to hold that “the term of the obligations
[was] not material” (308 U.S. at 420). “Where the
consideration is wholly in the transferee’s bonds, or
part cash and part such bonds, we think it cannot be
said that the transferor retains any proprietary in-
terest in the enterprise. On the contrary, he becomes
a creditor of the transferee” (id. at 420-421).
These cases established that a transaction is a
“sale” and not a “reorganization exchange” where
the sole consideration received comprises debt obliga-
tions and cash. In Helvering v. Minnesota Tea Co.,
296 U.S. 378 (1935), this Court considered the proper
outcome where the transferor receives some equity as
well. The Court noted its holding in Pinellas Ice that
* The Treasury Regulations, drawing upon these cases,
formulated the difference between a sale and a reorganization
in verms of the requirement of “continuity of proprietary in-
terest.” See Treas. Reg. 86, art. 112(g¢)(2) (19385) (“The
term [‘reorganization’] does not embrace the mere purchase
by one corporation of the properties of another corporation,
for it imports a continuity of interest on the part of the trans-
feror or its stockholders in the properties transferred. If the
properties are transferred for cash and deferred payment
obligations of the transferee evidenced by short term notes,
the transaction is a sale and not an exchange.”). This pro-
vision has been repeated, and expanded upon, in all succeeding
regulations. E.g., Treas. Reg. §§ 1.368-1(b), 1.368-2(a). The
courts have uniformly held that these principles apply to inter-
corporate asset transfers, regardless of whether they are
formally structured as a purchase of assets or (as here) as a
statutory merger. See Southwest Natural Gas Co., 189 F.2d
at 334; Roebling v. Commissioner, 143 F.2d 810, 812 (3d Cir.),
cert. denied, 323 U.S. 773 (1944).
16
a reorganization presupposes on the transferor’s part
a continuing “ ‘interest in the affairs of the purchas-
ing company’” (296 U.S. at 385 (quoting 287 U.S.
at 470)). “[W]e now add,” the Court wrote, “that
this interest must be definite and material” and
“must represent a substantial part of the value of the
thing transferred” (296 U.S. at 385). In the Court’s
view, it did not matter that “the relationship of the
[transferor] to the assets conveyed was substantially
changed,” since this will invariably occur in a reor-
ganization. The important point, rather, was to com-
pare the value of the equity interest received to the
value of the total consideration received, so as to de-
termine whether the former “represent[ed] a sub-
stantial part of the value” of the latter (296 U.S. at
385, 386) .*
* The relative amounts of equity and non-equity considera-
tion that can be received by the transferor consistently with
the “continuity of proprietary interest” requirement have
never been precisely defined. In Minnesota Tea, consideration
comprising 56% common stock and 44% cash was held to
suffice (296 U.S. at 381-382, 385). In John A. Nelson Co. Vv.
Helvering, 296 U.S. 374 (1935), consideration comprising 38%
equity (consisting of an entire issue of preferred stock) and
62% cash was likewise held satisfactory. See 296 U.S. at
376; Bittker & Eustice £ 14.11, at 14-19. Transactions in
which equity represents less than 20% of the total considera-
tion have almost invariably been considered sales. See, ¢.v.,
Southwest Natural Gas, 189 F.2d at 334-335 (1% equity) ;
Yoe Heating Corp. v. Commissioner, 61 T.C. 168, 177-178
(1973) (15% equity); Kass v. Commissioner, 60 T.C. 218,
227 (1973) (16% equity); Rev. Rul. 80-285, 1980-2 C.B. 119
(19% equity); Rev. Rul. 80-284, 1980-2 C.B. 117 (14%
equity). For advance ruling purposes, the IRS regards 50°
equity as sufficient for “continuity of interest” purposes.
Rev. Proc. 77-37, 1977-2 C.B. 568, 569; Rev. Rul. 66-224,
1966-2 C.B. 114-115.
17
In the present case, petitioners surrendered their
Commerce stock for Citizens dollar obligations—a
passbook savings account and time certificates of
deposit—that were functionally equivalent to short-
term promissory notes. There can be no doubt under
the cases discussed above that, if petitioners had
transferred their a stock for identical consideration
to an ordinary corporation, a commercial bank, or a
stock savings and loan association, the transfer would
be a sale and their gain would be immediately rec-
ognized. The only question is whether the result
should be different here simply because the buyer
was a mutual institution.
We submit that any such difference in result would
be unjustifiable. Petitioners acknowledge that their
savings accounts “in some ways resemble bank de-
posits” (Br. 6), yet assert that the resemblance is
merely superficial and that, by becoming “members”
in Citizens, they gained proprietary rights signifi-
cantly different from the rights of a bank depositor.
Their claim does not withstand analysis. The provi-
sions of the Internal Revenue Code governing mutual
savings and loan associations demonstrate that those
institutions, for federal tax purposes, are substan-
tially identical to banks, and that accounts main-
tained at those institutions, for federal tax purposes,
are substantially identical to bank deposits. And
when the merger is considered in pragmatic rather
than in formal terms, it is clear that the equity fea-
tures accompanying petitioners’ accounts—which are
the same equity features accompanying all of Citi-
zens’ savings accounts—did not “represent a sub-
stantial part of [their] value” (Minnesota Tea, 296
U.S. at 385), and that the merger, from both Citi-
zens’ and petitioners’ points of view, was a sale.
18
1. In construing other statutes, this Court has
held that withdrawable accounts in a savings and
loan association, for purposes for the Securities Ex-
change Act of 1934, 15 U.S.C. 78a, constitute “secu-
rities” (Tcherepnin v. Knight, 389 U.S. 332 (1967)),
and that such accounts, for purposes of 38 U.S.C.
3101(a) (relating to the exempt status of veterans
benefits) “retain the qualities of moneys [which]
have not been converted into permanent investments”
(Porter vy. Aetna Casualty Co., 370 U.S. 159, 162
(1962)). Both decisions, of course, turned upon the
language and purposes of the particular statutes un-
der which the cases arose, and neither purported to
establish a universal rule. But they do demonstrate
that it is appropriate in this tax case to look first to
the manner in which the Internal Revenue Code deals
with savings and loan associations, particularly fed-
erally-chartered, mutual associations like Citizens.
The evolution of the relevant Code provisions reveals
a deliberate congressional intent increasingly to
assimilate those institutions and their members to
banks and their depositors.
Until 1951, most mutual savings banks, coopera-
tive banks, domestic building and loan associations,
and federal savings and loan associations were ex-
empt from the federal income tax.’ In 1951, however,
Congress found that these institutions were in active
* The exemption for federal S&Ls was accomplished by the
Home Owners Loan Act of 1933, ch. 64, § 5(h), 48 Stat. 133,
12 U.S.C. (1946 ed.) 1464(h). The exemption for the other
three groups was accomplished by Section 101(2) and (4)
of the Internal Revenue Code of 1939, ch. 2, 53 Stat. 33
(hereinafter 1939 Code).
19
competition with other financial institutions and
were no longer principally engaged in fulfilling the
“mutual” functions for which they had been estab-
lished."" The Senate Finance Committee noted that
" See, ¢.¢., S. Rep. 781 (Pt. 1), 82d Cong., Ist Sess. 25
(1951):
At the present time, mutual savings banks are in active
competition with commercial banks and life insurance
companies for the public savings, and they compete with
many types of taxable institutions in the security and
real estate markets. As a result your committee believes
that the continuance of the tax-free treatment now ac-
corded mutual savings banks would be discriminatory.
* * * The tax treatment provided by your committee
would place mutual savings banks on a parity with their
competitors.
"' See, ¢.¢., S. Rep. 781, supra, at 27 (discussing state and
federal S&Ls) :
In the early days of these institutions, the transactions
of the associations were confined to members, and no one
could participate in the benefits they afforded without
Lecoming a shareholder. Individuals became investing
members of these organizations in the expectation of
ultimately becoming borrowing members as well. Mem-
bership implied not only regular payments to the associa-
tion for a considerable period of time, but also risk of
losses. Members could not cancel their memberships or
withdraw their shares before maturity without incurring
heavy penalties. The fact that the members were both the
borrowers and the lenders was the essence of the “mutual-
ity” of these organizations.
Although many of the old forms have been preserved
to the present day, few of the associations have retained
the substance of their earlier mutuality. The steady de-
cline in the proportion of share-accumulation loans is
evidence that the character of these organizations has
changed. More and more, investing members are becom-
ing simply depositors, while borrowing members find
dealing with a savings and loan association only tech-
“savings and loan associations are no longer self-
contained cooperative institutions as they were when
originally organized” and that “there is relatively
little difference between their operations and those of
other financial institutions which accept deposits
and make real-estate loans.” S. Rep. 781, 82d Cong.,
lst Sess. 28 (1951). Accord, H.R. Conf. Rep. 1179,
82d Cong., Ist Sess. 71-73 (1951); H.R. Conf. Rep.
1213, 82d Cong., Ist Sess. 73-74 (1951).
Congress determined that maintenance of the exist-
ing tax exemption for mutual institutions under
these circumstances would be “discriminatory” (5S.
Rep. 781, supra, at 25) and accordingly repealed it."
Consistently with that treatment, Congress amended
the Code to allow mutual institutions a deduction for
amounts placed in bad-debt reserves (similar to the
deduction already granted banks), and to allow
mutual institutions a deduction for amounts paid as
“dividends” to their depositors (just as banks were
permitted to deduct interest paid to theirs).” Con-
nically different from dealing with other mortgage lend-
ing institutions in which the lending group is distinct
from the borrowing group. In fact, borrowers ordinarily
have very little voice in the affairs of most savings and
loan associations.
One characteristic of the earlier mutuality which re-
mains is the absence of capital stock. However, the char-
acter of the organization has been modified by the prac-
tice of paying more or less fixed rates of return on
shares, and of building up substantial surplus accounts
to protect shareholders against the risk of losses.
" Revenue Act of 1951, ch. 521, §313(a), (b) and (c), 65
Stat. 490.
™ Revenue Act of 1951, ch. 521, §313(f), 65 Stat. 491,
amending 1939 Code § 23(r), 53 Stat. 16. See S. Rep. 781,
supra, at 28. The provision permitting mutual savings and
21
gress likewise revised the definitional provisions of
the 1939 Code to include most savings and loan asso-
ciations, whether state- or federally-chartered, within
the definition of “banks.” “
Three years later, in the Internal Revenue Code of
1954, Congress for the first time provided an exclu-
sion from gross income for up to $50 of “dividends
from domestic corporations.” Internal Revenue Code
of 1954, ch. 736, § 116(a), 68A Stat. 37. Congress
was careful to provide. however, that this exclusion
was not available for “dividends” paid by S&Ls to
their depositors and deducted by the former under
Section 591. /d. §$116(c)(1). Congress provided,
rather, that such dividends “shall not be treated as a
dividend” for this purpose (ibid.)."
loan associations to deduct “dividends” paid on deposits is
now incorporated in L.R.C. § 591.
“ Revenue Act of 1951, ch. 521, §313(h), 65 Stat. 491,
amending 1939 Code § 104(a), 53 Stat. 36 (revising defini-
tion of “bank” to include “a domestic building and loan
association”); Revenue Act of 1951, ch. 521, §313(i), 65
Stat. 491, adding 19389 Code § 3797(a) (19) (defining “domes-
tie building and loan association” to include “a domestic
savings and loan association” and “a Federal savings and loan
association, substantially all the business of which is confined
to making loans to members”).
"In 1980, Congress temporarily amended Section 116 to
provide an exclusion for up to $200 ($400 in the case of joint
returns) of amounts received either as interest or as dividends
from domestic corporations. Crude Oj] Windfall Profit Tax
Act of 1980, Pub. L. No. 96-223, § 404(a), 94 Stat. 305,
amending I.R.C. §116(a) and (b). “Interest” for that pur-
pose was defined to include “interest on deposits with a
bank” and “amounts (whether or not designated as interest)
paid in respect of deposits * * * by a mutual savings bank,
cooperative bank, [or] domestic building and loan asso-via-
tion.” Jd. § 404(a), amending I.R.C. § 116(c) (1) (A) and (B).
pod
In 1962, Congress expanded Section 591 to allow sav-
ings and loan associations to deduct, not only amounts
paid “as dividends * * * on their deposits or with-
drawable accounts,” but also amounts paid “as divi-
dends or interest” on those accounts." Congress like-
wise drew a sharp line between “dividends” paid by
S&Ls to their depositors (which were deductible un-
der Section 591) and “distributions of property”
paid by stock S&Ls to their shareholders (which were
not to be deductible under Section 591). Such “dis-
tributions of property,” rather, were made subject to
the provisions of the Code dealing with ordinary cor-
porate dividends (1.R.C. $$ 301, 312, 317(a)), re
demptions (1.R.C. $302), and liquidations (1.R.C.
* Revenue Act of 1962, Pub. L. No. 87-834, § 6(f), 76 Stat.
984 (emphasis added), amending LR.C. § 591. Congress in
the same provision made the Section 591 deduction available
to “other savings institutions chartered and supervised as
savings and loan or similar associaitons under Federal or
State law.” even if they did not come within the definition of
“domestic building and lean associations” set forth in Section
T701(a) (19). See S. Rep. 1881, 87th Cong., 2d Sess. 191
(1962) : H.R. Conf. Rep. 2508, 87th Cong., 2d Sess. 24 (1962).
At the same time, Congress amended and expanded the Section
7701 (a) (19) definition to include almost all federal S&la,
regardless of whether “substantially all [their] business * * *
‘was] confined to making loans to members.” Compare Reve-
nue Act of 1962, $6(c), 76 Stat. 982-983, with 26 U.S.C.
(1958 ed.) 7T701(a) (19). This expansion reflected Congress's
belief that S&Las, in practice, were operating in the same
fashion as other lending and financial institutions, ¢.¢.. by
making loans that were not in substance loans to members,
but which were brought into conformance by making instan-
taneous “members” of borrowers. See H.R. Rep. 1447, 87th
Cong., 2d Sess. 37, A49-A50 (1962); H.R. Conf. Rep. 2508,
supra, at 21-23.
Revenue Act of 1962, § 6(a), 76 Stat. 977-982, adding 26
U.S.C. (1964 ed.) 593(f) (currently codified as LRC.
§ 593(e)).
§§ 331, 346), provisions that, despite petitioners’ sug-
gestion to the contrary (Br. 41), are clearly inappli-
cable to withdrawals from savings accounts. See
H.R. Rep. 1447, 87th Cong., 2d Sess. 36, A48 (1962) ;
S. Rep. 1881, 87th Cong., 2d Sess. 47, 187-188
(1962). These amendments demonstrate a clear con-
gressional intent that mutual savings accounts should
not be treated as “stock” for federal tax purposes,
since the “dividends” paid on those accounts are not
subject to any of the rules applicable to dividends
paid on stock generally.
Throughout this period, the capital structure of
federal savings and loan associations was governed
by Section 5(b) of the Home Owners’ Loan Act of
1933, ch. 64, 48 Stat. 132, which provided that
“[s]uch associations shall raise their capital only in
the form of payments on * * * shares” and that
“[n]Jo deposits shall be accepted” by them. In 1958,
a group of commercial banks challenged the validity
of Bank Board regulations issued under Section 5(b),
contending that the regulations improperly author-
ized S&Ls to raise capital by accepting deposits
and thus illegally to compete with banks. Wisconsin
Bankers Ass'n vy. Robertson, 294 F.2d 714 (D.C.
Cir.), cert. denied, 368 U.S. 938 (1961). The court
of appeals upheld the regulations, even though they
defined S&L capital to include “payments on savings
accounts” rather than “payments on shares” (294
F.2d at 716), and even though savings and loan asso-
ciations were “coming to be regarded by the public
much as the equivalent of a bank” (id. at 717 (Bur-
ger, J., concurring) ).*
18 Petitioners err (Br. 26-27) in relying on the concurring
opinion of Judge (now Chief Justice) Burger in Wisconsin
Bankers to support their position here. Judge Burger noted
24
In 1968, however, Congress decided that the formal
capital structure of federal S&Ls should be brought
more nearly into conformity with the public view of
those institutions. It accordingly amended Section
5(b) to permit them to raise capital, not only in the
form of “payments on shares,” but in the form of
“savings deposits, shares, or other accounts, for fixed,
minimum, or indefinite periods of time * * * [or by
issuing] such passbooks, time certificates of deposit,
or other evidence of savings accounts as are * * *
authorized.” ” The following year, Congress amended
(294 F.2d at 717) that, even though “[t]he superficial simi-
larities of [S&L] associations to banks [are] admittedly very
great,” the validity of the Board’s regulations turned not on
“appearances but [on] legal realities.” Under the version of
Section 5(b) then in effect, he observed, a savings and loan
association was required to raise capital “by payments on
shares” (294 F.2d at 717), and he found no reason to conclude
that the Board’s regulations, in speaking of “payment on sav-
ings accounts,” intended improperly to expand their statutory
powers. As noted in the text (pages 24-25), however, Con-
gress has since amended Section 5(b) to permit S&Ls to raise
capital by issuing all manner of depositary instruments, so
that the “legal realities” as well as the economic appearances
now confirm their bank-like nature. In any event, Judge
Burger carefully tied his analysis to Section 5(b) of the
Home Owners Loan Act. The question here concerns the
proper construction of the Internal Revenue Code, and it is
well established that the “substance” rather than the “form”
of transactions governs for federal tax purposes. Gregory
v. Helvering, 293 U.S. 465 (1985).
1% Housing and Urban Development Act of 1968, Pub. L.
No. 90-448, $1716(a), 82 Stat. 608, amending 12 U.S.C.
1464(b). See H.R. Rep. 1585, 90th Cong., 2d Sess. 152
(1968); H.R. Conf. Rep. 1785, 90th Cong., 2d Sess. 164
(1968). In Section 1716(b) of the same law (82 Stat. 608)
Congress amended Section 5(c) of the 1933 Act, 12 U.S.C.
1464(c), to provide that S&Ls should make loans “on the
25
the definition of “domestic building and loan associa-
tion” in Section 7701(a)(19) of the Internal Reve-
nue Code to conform it to the broadened provisions of
Section 5(b) of the 1933 Act.” As amended, Section
7701(a) (19) (B) defined such associations to include
those whose business “consists principally of acquir-
ing the savings of the public and investing in
loans’”—a definition that aptly describes banks as
well.
Petitioners lay great emphasis on the notion that
their savings accounts are technically called “share
accounts” (Br. 2, 3, 5) and that Citizens’ charter
permits it to raise capital only by accepting payments
on accounts which “represent share interests in the
association” (Br. 2, 18). The statutory developments
outlined above, however, demonstrate that this ter-
minology, for federal tax purposes at least, is a
formalistic anachronism. Mutual savings and loan
associations perform an economic function substan-
tially similar to that performed by banks, and they
are governed by a federal tax regime substantially
similar to that governing banks. Their savings ac-
counts, while retaining a name that sounds like
equity, are for all practical purposes equivalent to
debt, and are treated by the Internal Revenue Code
security of [their] savings accounts” rather than “on the secu-
rity of their shares.” More recently, Congress has authorized
federal S&Ls to accept demand deposits which have the same
priority on liquidation as savings accounts, and to issue
accounts that are subject to check or negotiable order of
withdrawal. Thrift Institutions Restructuring Act of 1982,
Pub. L. No. 97-320, § 301, 96 Stat. 1469, amending 12 U.S.C.
1464(b) (1) (A), (B) and (E).
* Tax Reform Act of 1969, Pub. L. No. 91-172, § 432(c),
83 Stat. 622.
26
as bank deposits and not as stock. The court of ap-
peals thus correctly concluded (Pet. App. 30-31) that
petitioners’ savings accounts, “despite certain for-
mal equity characteristics, are in reality indistin-
guishable from ordinary savings accounts and are
essentially the equivalent of cash.” ™
2. The conclusion that petitioners’ accounts were
essentially bank deposits, dictated by the statutory
developments outlined above, is confirmed when one
considers the economic realities of the merger in-
volved here. That transaction was plainly regarded
by Citizens as a “purchase” and by petitioners as a
“sale.” For tax purposes it should be treated the
same Way.
a. By virtue of the merger, Citizens acquired an-
other savings and loan association—its bricks and
2! As petitioners note with some frequency (Br. 5, 11, 28,
29, 35), the definitional provisions of the Code generally
provide that “(t]he term ‘stock’ includes shares in an associa-
tion” and that “[t]he term ‘shareholder’ includes a member
in an association.” I.R.C. § 7701(a)(7) and (8). Those
general definitions, however, apply only where not “mani-
festly incompatible with the intent” of other, more particular,
Code provisions. I.R.C. § 7701(a) (first sentence). To treat
S&L share accounts as “stock” would be “manifestly incom-
patible” with Section 593(e), which draws a sharp line be-
tween the “dividends” paid on such accounts and true cor-
porate dividends. See pages 22-23, supra. And to treat S&L
share accounts as “stock” would be “manifestly incompatible
with the intent” of the Code’s ization provisions, which
presuppose a continuity of etary interest. Far more
relevant to decision here is the definition of “domestic build-
ing and loan association” contained in Section 7701 (a) (19),
which, as noted above (pages 21 & note 14, 22 & note 16, 24-25,
supra), represents the culmination of a process by which
savings and loan associations for tax purposes were gradually
assimilated to banks.
27
mortar, its typewriters and automatic tellers, and,
most importantly perhaps, its customer base. Citi-
zens paid for its acquisition with various types of
short-term debt. Those instruments, because subject
to withdrawal on demand or at stated maturities, are
obviously “liabilities” in an economic and balance-
sheet sense, It is true that Citizens, like many
buyers, elected to finance its purchase by making its
dollar obligations due serially over time. But a pur-
chase thus financed is a purchase just the same.
For analytical purposes, it is revealing to note the
tax consequences of “reorganization” treatment for
an acquiring corporation like Citizens. The decisions
differentiating between “sales” and “reorganizations”
have generally arisen in litigation by the transferor
corporation or its shareholders claiming nonrecogni-
tion of gain. But the reasons for differentiating sales
from reorganizations are equally weighty when the
effects upon the acquiring corporation are considered.
Section 362(b) of the Code generally provides a
“carryover basis” for assets received by a corporation
in a corporate reorganization. It says that “[i]f
property [is] acquired by a corporation in connection
with a reorganization * * *, then the basis shall be the
same as it would be in the hands of the transferor,
increased in the amount of gain recognized to the
transferor on such transfer.” Suppose, for example,
that Corporation A transfers assets with a fair mar-
ket value of $40,000, but with a tax basis of $100,000,
to Corporation B, which issues its notes in the amount
of $40,000 to Corporation A or its shareholders.”
= The fair market value of Corporation A’s assets might be
lower than their tax basis, e.g., because Corporation A’s busi-
ness was poor or because it was in failing circumstances.
These conditions, of course, have not been uncharacteristic of
the savings and loan industry in recent years.
Corporation B will take the assets with a basis of
$100,000 if the transaction is held to be a reorganiza-
tion, but with a basis of $40,000 if the transaction is
held to be a sale. Thus, in the case of a reorganiza-
tion, a transferee corporation receiving high-basis
property will receive a permanent tax benefit, to be
realized via higher depreciation deductions or in the
computation of a loss upon disposition of the property
acquired. The result is that, when a corporation
uses dollar obligations to acquire property, it is vital
for proper administration of the tax laws to recog-
nize that the transaction is a purchase for the
amount of the dollar obligations issued. Otherwise,
to use the figures of our example, the acquiring cor-
poration will receive property with a basis of $100,-
000 by paying only $40,000. Cf. Civic Center Finance
Co. v. Kuhl, 83 F. Supp. 251 (E.D. Wis. 1948), aff'd,
177 F.2d 706 (7th Cir. 1949).
In this case, Citizens acquired the assets of Com-
merce by issuing its dollar obligations to the former
shareholders of Commerce, and by assuming dollar
for dollar the savings accounts and other liabilities
of Commerce. There is no reason why the assets Citi-
zens has purchased should not take a basis in its
hands measured by the dollar obligations it has un-
dertaken, i.e., their cost, and every reason why they
should.
b. From petitioners’ viewpoint, conversely, the
merger plainly had all the earmarks of a “sale.”
Petitioners traded their Commerce stock for dollar
2 This permanent tax benefit accruing to the transferee
corporation is to be contrasted with the deferral benefit real-
ized by the transferor’s shareholders, for whom recognition
gain is simply postponed until the stock or securities re-
ved in the reorganization are sold.
obligations resembling bank deposits. Although those
obligations in a technical sense carried with them
certain proprietary features, it can scarcely be
imagined that those features loomed large at the bar-
gaining table, or that petitioners attached any real
worth $12 a share, and the consideration petitioners
received for each share was a $12 deposit in a sav-
ings account. If petitioners really thought that the
accounts’ “equity characteristics” had any material
worth, Citizens presumably could have persuaded
them to surrender ezch share of stock for a savings
account deposit materially smaller than that sum.
At all events, it is plain that the proprietary features
accompanying the accounts did not “represent a sub-
stantial part of the value” (Minnesota Tea, 296 U.S.
at 385) of the total consideration petitioners received.
Petitioners emphasize (Br. 16, 19) that they
gained the right to vote as “members” of Citizens.
They dismiss the voting rights of Citizens’ borrowers,
who clearly enjoy no proprietary interest, as “nomi-
na’” (Br. 18). But petitioners’ own right to vote—
one vote per $100 in their accounts—was limited to
400 votes (Pet. App. 27), so that they could not cast
the 2,096 votes to which, had there been no arbitrary
limit, their alleged “equity interest” should have en-
titled them. Their limited right to vote, moreover,
was “infinitely dilutable” (Pet. App. 27) upon the
addition of new borrowevs, enrollment of new deposi-
tors, and any increase in existing depositors’ amounts
on deposit.“ The right to vote in most savings and
™* While acknowledging that Citizens’ charter permits it to
raise an unlimited amount of capital (Br. 20-21), petitioners
loan associations, as in mutual insurance companies,
is usually more formal than substantial; the govern-
ing boards in fact tend to be self-perpetuating. See
York v. Federal Home Loan Bank Board, 624 F.2d
495, 497 n.1 (4th Cir.), cert. denied, 449 U.S. 1043
(1980) (“[i]n practice, a depositor [in a mutual S&L]
signs a proxy form when first opening an account
which allows the officers of the association to cast
[his] votes as they se€ fit.”). The right to vote, in
any event, is not in itself a proprietary interest. The
graduates of many educational institutions, as well
as the members of countless nonprofit organizations,
vote to elect some or all of the members of the gov-
erning boards, but they can hardly be said to have a
proprietary interest.
Petitioners stress that their savings accounts give
them the opportunity to receive payments that Citi-
zens styles “dividends.” They make much of the fact
that they are not “legally entitled” to these payments
(Br. 22); that the payments are theoretically made
“out of [the] profits of the enterprise” (ibid.); and
that, according to Citizens’ charter, “(t]he amount of
the distribution on accounts, if any, is determined
and declared periodically by the Board of Directors”
(id. at 23). But petitioners see the form and miss
the substance. They acknowledge that Citizens in
fact “pays a fixed, preannounced rate on all ac-
counts” (Pet. App. 27). They cite no instance where
note that the charter grants the hoard of directors the power,
inter alia, “[t]o reject any ap, icon for savings accounts or
memberships” (J.A. 50). This provision has the ring of
boilerplate, and petitioners do not suggest that the power is
ever exercised in practice. In practice it seems most unlikely
that it ever would be, for to do so would be to turn away
business.
31
the Board of Directors has “determined and de-
clared” any other rate. The “dividends” Citizens
pays on its savings accounts are treated for federal
tax purposes exactly like the interest paid by stock
S&Ls and banks.” And common sense shows that
this tax treatment accurately reflects the economic
reality, for “[{i]t is fanciful to suggest that deposi-
tors deciding where to put their money attach any
weight to whether an institution is a mutual or a
stock association” (Pet. App. 27-28). The market-
* As noted above (see pages 20-21, supra), Citizens’ divi-
dends (unlike normal corporate dividends) are dedjuctible by
it (1.R.C. § 591) and do not qualify for the “dividend exclu-
sion” in its depositors’ hands (1.R.C. § 116(c)(1)). Petition-
ers note (Br. 23-24) that the Commissioner, in a pair of rul-
ings issued thirty years ago and in a different context, once
took the view that S&L account holders should treat their
dividends as “dividends” rather than as “interest.” Rev. Rul.
54-624, 1954-2 C.B. 16, 18; LT. 4046, 1961-1 C.B. 34. Those
rulings, however, were declared obsolete in 1972 and 1968
respectively. Rev. Rul. 72-621, 1972-2 C.B. 651; Rev. Rul.
68-100, 1968-1 C.B. 572. As we have observed (pages 18-25,
supra), much has changed in the world of S&l« (including
significant changes in their treatment by Congress) since
1954, and the IRS has long since instructed taxpayers to re-
port S&L “dividends” as interest, and not as dividends, on
their personal tax returns. See IRS, /nstructions for Prepar-
ing Form 1040, at 9 (1984); IRS, Publication No. 17, Your
Federal Income Taz 35-36, 38 (1977) (for use in preparing
1976 tax returns). Instructions for preparation of informa-
tion returns by payors likewise state that so-called “dividends”
on “share accounts” in federal S&lLs should be reported on
Form 1099-INT, and not on Form 1099-DIV. See IRS, /n-
structions for Form 1096 (Annual Summary and Transmittal
of U.S. Information Returns) and Forms 1099-ASC, 1099-B,
1099-DIV, 1099-G, 1099-INT, 1099-MISC, 1099-OID, 1099-
PATR, and 5498, at 5 (1984).
place ensures that “interest paid by mutual associa-
tions is competitive with interest paid by stock as-
sociations and commercial banks” (id. at 28), and
the name attached to the payment is not likely to
make any difference to the depositor.
Petitioners also stress (Br. 20) the fact that, if
Citizens should ever be dissolved or wound up, all its
savings account holders would share pro rata in the
distribution of its assets, But that problematic in-
terest, subject in any event to Citizens’ power to
redeem all or any part of its accounts, has been
described by this Court (Society for Savings v.
Rowers, 349 U.S. 143, 150 (1955)) in terms that
demonstrate its insubstantiality :
If a depusitor withdraws from the bank, he
receives unly his deposits and interest. If he con-
tinues, his only chance of getting anything more
would be in the unlikely event of a solvent liqui-
dation, a possibility that hardly rises to the level
of an expectancy. It stretches the imagination
very far to attribute any real value to such a
remote contingency, and when coupled with the
fact that it represents nothing which the deposi-
tor can readily transfer, any theoretical value
reduces almost to the vanishin7z point.
Indeed, it was on this basis that the Fourth Circuit
recently ruled that a “member” (i.¢., depositor) of a
federal mutual S&L could not block conversion into a
stock form of organization, holding that depositors
would not thereby be deprived of property rights
since their “only actual rights, their rights as credi-
tors of the association, will remain unchanged.”
York v. Federal Home Loan Bank Board, 624 F.2d
at 500.
Ultimately, petitioners’ claim to reorganization
treatment seems to rest on the observation (Br. 6)
that Citizens’ savings account holders own all the
“equity” there is in the association. Under these cir-
cumstances, petitioners contend, failure to acknowl-
edge the substantiality of their proprietary interest
would be tantamount to holding that mutual institu-
tions have no owners. It is this argument that seems
to have persuaded other courts of appeals to reject
the Commissioner’s view of the transaction involved
here. See Capital Savings & Loan, 607 F.2d at 976;
Savings & Loan, 494 F.2d at 411.
The argument, however, misconceives the Commis-
sioner’s position. The Commissioner has never con-
tended, either in this case (see page 5, supra) or in
earlier cases (¢.g., Capital Savings & Loan, 607 F.2d
at 972), that account holders in a mutual institution
have no proprietary rights. See Rev. Rul. 69-6,
1969-1 C.B. 104. The government’s position, rather,
is that the proprietary rights acquired by the trans-
feror corporation’s stockholders in a transaction of
this sort are too insubstantial to convert into a “reor-
ganization” what bears all the earmarks of a “sale.”
As the court of appeals aptly noted (Pet. App. 30),
petitioners’ argument fails to distinguish between the
relevance of the savings accounts’ proprietary fea-
tures to Citizens’ balance sheet on the one hand, and to
the former Commerce stockholders on the other. There
can of course be “little doubt that the passbook ac-
counts are equity in the sense that they represent
[Citizens’] entire capital structure” (Pet. App. 30).
Business organizations like Citizens, whether or not
they have stock outstanding, are presumptively
owned by someone. The fact that an “equity compo-
nent” to the savings accounts is a logical necessity
from Citizens’ point of view, however, does not mean
that those equity features, from petitioners’ point of
view, “represent[ed] a substantial part of the value”
(Minnesota Tea, 296 U.S. at 385) of what they got.
Under this Court's cases, it is not merely the exist-
ence of equity features, but their materiality and
substantiality, that determine whether a merger is a
“reorganization” or a “sale.” See id. at 385-386;
John A. Nelson Co. v. Helvering, 296 U.S. 374, 377
(1935).
The court of appeals correctly held that the equity
features incorporated in petitioners’ savings accounts
had insubstantial value and that the accounts’ “debt
characteristics overwhelmingly predominate[d]”
(Pet. App. 24). Indeed it is obvious, as a matter of
common sense, that no one would pay anything extra,
beyond the number of dollars on deposit, for the
“equity features” accompanying petitioners’ accounts,
for one could acquire those equity features for free
simply by using the same number of dollars to open
an account in one’s own name. Petitioners plainly
regarded the accounts—as one would regard any
checking or savings account—as the equivalent of
cash. Petitioners’ investment was virtually risk-free,
being represented by short-term accounts that were
federally insured.“ The accounts were subject to
withdrawal by petitioners and to retirement at the
* Petitioners note (Br. 22) that federal insurance for sav-
ings accounts in mutual institutions is generally limited to
$100,000 per depositor. 12 U.S.C. 1728(a). This limitation,
however, does not substantially diminish the relatively risk-
free, and therefore non-equity, nature of such obligations. As
will of Citizens, and thus in no sense represented a
permanent contribution to the association’s capital.
And the accounts’ “market value” was clearly equal
to the sum of their “debt characteristics,” ie., the
principal balance outstanding plus any interest ac-
crued thereon.
In short, while petitioners clearly had an equity
interest in Commerce, they just as clearly received
SS ee a creditor’s interest in Citi-
zens. Far continuing the proprietary stake they
previously held, they essentially cashed their invest-
ment out. Because the merger thus failed to evince
the “continuity of proprietary interest” requisite to
a “reorganization” under the Internal Revenue Code,
the transaction was properly treated as a sale of peti-
tioners’ stock producing currently taxable gain.”
* Petitioners seek to characterize both the decision below
(Br. 5-6, 14-15) and the Commissioner's position (Br. 5-6,
16) as making satisfaction of the “continuity of interest” re
“the nature of the interest received” (Br. 16). This is a mis-
characterization in both respects. As petitioners (Br. 15)
correctly observe, this Court in Minnesota Tea held that “con-
tinuity of interest” does not depend on whether “the relation-
ship of the [transferor] to the assets conveyed {has} sub
stantially changed,” but on whether the value of the equity
interest received “represent/s] a substantial part of the value
of the thing transferred.” See 296 U.S. at 385-886 and page
16, supra. Consistently with Minne ofa Tea, however, the
Commissioner here does not seek { deny “reorganization”
sioner seeks to deny “reorganization” treatment, rather, be
cause the value of the proprietary interest petitioners acquired
—viewed in absolute terms—was an insubstantial part of the
:
1
|
254 and 356 of the Code impose strict limitations on
rities are surrendered.” In such situations, the secu-
rities received constitute “other property” (1.R.C.
§ 356(d)(1) and (2)), and gain must be recognized
up to the fair market value thereof (LR.C. $§ 354
37
accounts are imbued with sufficient equity character-
istics to satisfy the “continuity of proprietary inter-
est” test, and thus to enable the overall] transaction
to qualify as a “reorganization,” the effects of the
reorganization exchange on petitioners must still be
gauged by testing the consideration they received un-
der Sections 354 and 356. Since petitioners sur-
rendered only stock, they must recognize gain under
those Sections to the extent that they acquired, not
just “stock,” but “securities,” “money” or “other
property.”
The savings accounts petitioners received plainly
do not constitute “stock” pure and simple. Rather, as
the Commissioner pointed out below, they constitute
“a hybrid interest, representing debt which is the
equivalent of cash while, at the same time, having
certain equity features” (Pet. App. 10). The “hybrid”
nature of mutual savings accounts has been recog-
nized, not only by the court of appeals below (Pet.
App. 30, 32), but also by the Tax Court (id. at 14)
and the other courts that have sustained “reorganiza-
tion” treatment for mergers of this sort (Capital
Savings & Loan, 607 F.2d at 974; West Side Federal
Savings & Loan, 494 F.2d at 411). And leading
commentators have recognized that, in the case of
such “hybrid” interests, where “a sirgle instrument
* * * constitute[s] ‘stock’ but also embod[ies]
rights of a ‘nonstock’ character,” the transaction,
“Tt]o the extent of the value of the latter rights,
* * * may be outside the reorganization provisions.”
Bittker & Eustice ©{ 14.11, 14.31, at 14-21, 14-95
n.242.
Here, petitioners clearly acquired “rights of a non-
stock character” in addition to whatever proprietary
interests they obtained in Citizens. What they ac-
38
quired, after all, were federally-insured savings ac-
counts withdrawable more or less at will. Although
petitioners’ “rights of a nonstock character”’ have a
strong flavor of cash equivalency, there is no need in
this case to decide whether those rights should be con-
sidered “securities,” “money,” or “other property”
(see page 12, supra). Since petitioners surrendered
only stock, they must recognize gain to the extent
they received anything but stock, regardless of how
those non-equity interests are denominated (1.R.C.
$§ 354, 356).
2. The Tax Court rejected this reasoning because
it thought the equity and non-equity features of peti-
tioners’ savings accounts were inseparable. In the
Tax Court’s view, Sections 354 and 356 are meant to
apply “where property qualifying for ‘tax-free’ ex-
change [is received] and, in addition, some other
property or money is received” (Pet. App. 17 n.25
(emphasis original) ). “Here,” the Tax Court noted,
“petitioners received only one type of property,
{namely,] savings accounts * * * in the form of
passbooks and time certificates” (ibid.). The court
then cited Capital Savings & Loan, supra, for the
proposition that “the cash deposit and proprietary
rights represented by [mutual savings] accounts are
not separable” (Pet. App. 17 n.25, citing 607 F.2d at
977), and concluded that petitioners’ accounts, if
they embodied any equity features at all, must neces-
sarily be “stock,” without more.
The Tax Court’s reasoning betrays a curious for-
malism. It is of course true that a savings account is
physically represented by a single piece of paper, and
that one cannot detach and sell the account’s equity
component as one could detach and sell (say) a stock
warrant that accompanies certain types of bonds.
39
But that does not mean that it is impossible to sepa-
rate out the stock and nonstock rights that a savings
account incorporates. Obviously, if petitioners had
transferred their Commerce stock to a stock savings
and loan association, and had received a package
comprising stock and savings accounts, they would
have to recognize gain up to the value of the latter.
Similarly, if petitioners had transferred their Com-
merce stock to a mutual savings and loan association,
and had received a package comprising cash and
“membership rights,” they would have to recognize
gain in the amount of the former. It cannot seriously
be contended that the result should be different here
simply because petitioners got cash equivalents in-
stead of cash, or because their creditor and member-
ship rights were bound up in one piece of paper
rather than in two.”
Differentiating ‘“equity-flavored” instruments into
their stock and nonstock components is not uncommon
in the tax law, either in the reorganization area” or
** Even if the Tax Court were correct in thinking that the
physical inseparability of the accounts’ “stock” and “nonstock”
features should make a conceptual difference, it is hard to see
why that court chose to characterize them the way it did. As
the Tax Court recognized (Pet. App. 14), the accounts are a
“hybrid” of debt and equity combined. If it were necessary to
categorize the accounts as being exclusively one or the other,
the logical approach seemingly would be to ascertain which
features are dominant, and classify the whole accordingly.
Here, it seems obvious that the accounts’ debt features are
predominant, so that they would not be “stock” even on the
Tax Court’s “inseparability” theory.
* See, e.g., Rev. Rul. 69-265, 1969-1 C.B. 109, 109-110
(analyzing value of conversion rights incorporated in con-
vertible preferred stock, and concluding that conversion rights
represented “property other than voting stock” for purposes
40
in other areas,” and such a differentiation is clearly
called for here. There is no reason why petitioners
should qualify for complete nonrecognition of gain
upon receipt of instruments that, if issued by any
other entity, would produce recognition of gain in
full, merely because the instruments they received
happen to have some equity features. Rather, peti-
tioners should be required, as taxpayers in all other
kinds of reorganizations are required, to recognize
gain up to the value of the non-equity interests re-
ceived in the exchange. I.R.C. §$§ 354(a)(2), 356
(a) (1) and (d) (2) (B).™
of Section 368(a) (1) (C)); Rev. Rul. 70-108, 1970-1 C.B. 78,
79 (analyzing value of additional stock-purchase rights in-
corporated in convertible preferred stock, and concluding that
such rights “constitute[] property other than solely voting
stock” for purposes of Section 368(a)(1)(B)). See generally
Bittker & Eustice { 14.31, at 14-94 to 14-101.
* See, e.g., Rev. Rul. 61-18, 1961-1 C.B. 5, 7 (analyzing
stock into true equity and “associated rights” for purposes of
determining the character of gain realized upon sale).
*\In taking the position that the stock and nonstock com-
ponents of petitioners’ savings accounts were not “separable,”
the Tax Court (Pet. App. 17-18 n.25) seemed to think that the
Commissioner himself had taken that position in Rev. Rul.
69-6, 1969-1 C.B. 104. In that ruling, the Commissioner con-
cluded that the merger of a stock S&L into a mutual S&L
does not satisfy the “continuity of interest” requirement and
hence constitutes a sale rather than a “reorganization” (1969-
1 C.B. at 104-105). In stating the facts upon which the ruling
was based, the Commissioner hypothesized a situation in
which “Y's obligation to deliver cash deposits to X's share-
holders is not severable from its obligation to deliver them
a proprietary interest,” since “[b]joth the cash equivalents
and the proprietary interests are evidenced by passbooks”
(1969-1 C.B. at 104). In that passage, however, the Commis-
sioner was not announcing a principle of law, but simply pro-
41
3. The record in this case would not permit one to
value the equity features of petitioners’ savings ac-
counts if one’s view were restricted to those features
alone. Fortunately, however, that is not necessary,
because the record rather clearly shows the value of
the accounts’ non-equity features. Those features
consist of the right to withdraw $210,000 in cash,
either on demand or at stated intervals, from Citi-
zens. Since the accounts are virtually risk-free and
bear an arm’s-length interest rate, the fair market
value of petitioners’ right to withdraw should be equal
—and is stipulated (see page 3 note 2, supra) to
be equal—to the accounts’ face value, viz., $210,-
000. Since the “fair market value” of petitioners’
non-equity rights thus exceeds the gain petitioners
realized ($153,000), they must recognize that gain
in full (1.R.C. § 356(a)(1)).
This reasoning, of course, produces the same result,
as far as petitioners and the other Commerce share-
holders are concerned,” as our primary submission,
i.e., that the merger was not a “reorganization.” See
pages 13-35, supra. This reasoning also suggests that
the value of the “equity components” of petitioners’
viding an argumentative statement of the facts from the
hypothetical taxpayer’s point of view. In ruling that the
merger was not a reorganization, the Commissioner clearly
did separate out the stock and nonstock components of the
savings accounts at issue, concluding that “[o]nly minimal
value can be assigned to the proprietary interests” and that
“the principal property received by [the transferor’s share-
holders] consists of withdrawable cash deposits as reflected
by their passbook balances” (1969-1 C.B. at 104).
“ This reasoning would not prevent the corporate parties
to the merger from enjoying whatever benefits “reorganiza-
tion” treatment affords. See, ¢.g., I.R.C. §§ 361, 362.
savings accounts is close to zero. But that merely
goes to show that our primary submission is correct.
C. Denial of “reorganization” treatment in this case is
supported by sound considerations of tax policy, and
there are no countervailing factors in petitioners’
favor
1. Common sense fully supports the court of ap-
peals’ construction of the Code’s reorganization pro-
visions, for any other interpretation would produce
anomalous results. If the instant merger were held
to be a “reorganization” and petitioners’ savings
accounts were held to be “stock,” petitioners would
receive a “substituted basis” in those accounts, t.¢., a
basis equal to their basis in the Commerce stock they
gave up. See I.R.C. § 358(a)(1). Since petitioners’
basis in their Commerce stock was $57,000, they
would receive a basis of $57,000 in cash equivalents
of $210,000. This result would violate the rule, uni-
form throughout the Internal Revenue Code, that
cash, when expressed in United States currency,
always has a basis equal to its face value. See, ¢..,
LR.C. §$§ 301(b), 358(a) (2), 362(c). Were this not
so, one would realize gain or loss on making change.
The result petitioners seek would also create seri-
keep the “new cash” (which would have a basis equal
to its face value) separate from the “old cash”
(which would have a substituted basis). Every time
petitioners withdrew money from their passbook sav-
43
ings accounts, they would be required to recognize
gain—a situation whose awkwardness would be even
more graphic had petitioners received checking ac-
counts instead of savings certificates (see page 25
note 19, supra). If petitioners’ CDs matured, and
their money were rolled over into another Citizens’
account, it would be unclear whether gain should be
recognized then, or whether recognition should be
deferred until the money was ultimately withdrawn
from the association. And if, as petitioners assert,
their savings accounts represent “stock,” each with-
drawal would presumably have to be analyzed under
Code Section 302 to determine whether it constituted
a “redemption” of stock producing capital gain, or a
distribution that was “essentially equivalent to a di-
vidend” and thus taxable as ordinary income (see
I.R.C. § 302(b)(1)). To undertake such an analysis,
of course, would seem inconsistent with Sections 591
and 593(e), which, as noted above (pages 22-23,
supra), contemplate that the Code’s dividend and
redemption rules do not apply to distributions or with-
drawals from mutual savings accounts. But that
seeming inconsistency only demonstrates the unsound-
ness of petitioners’ basic position.
2. Petitioners contend that the Commissioner’s
position, upheld by the court below, produces a dis-
criminatory result. As they note (Br. 16), the Com-
missioner has ruled that a mutual S&L can merge
tax-free into a stock S&L (Rev. Rul. 69-646, 1969-2
C.B. 54), and that a mutual S&L can merge tax-free
into another mutual S&L (Rev. Rul. 69-3, 1969-1
C.B. 103). Contrariwise, the Commissioner has ruled
that a stock S&L cannot merge tax-free inte a mutual
S&L (Rev. Rul. 69-6, 1969-1 C.B. 104), and that
ruling was sustained by the court of appeals here.
44
Petitioners contend (Br. 40-41) that these rulings
collectively place “an unwarranted burden” on
mutual institutions seeking to expand their business
by acquiring other companies.
The Commissioner’s rulings, obviously, do produce
different results for different transactions, but the
differences are entirely rational. When two mutual
associations merge, the depositors simply exchange
savings accounts in one for savings accounts in the
other; the depositors’ proprietary interests (such as
they are) continue without alteration, and the deposi-
tors cannot meaningfully be said to have “sold” their
accounts. See Rev. Rul. 69-3, 1969-1 B.C. at 104.
When a mutual association merges into a stock asso-
ciation, the depositors exchange their savings ac-
counts in the former for stock in the latter; the de-
positors’ proprietary interests continue (indeed, are
enhanced), and the transaction takes the classic
“reorganization” form of an asset acquisition for
stock. See Minnesota Tea, 296 U.S. at 385. Here, by
contrast, petitioners have exchanged their stock in
Commerce for savings accounts in Citizens; they
have, in essence, liquidated their equity investment,
and the transaction has taken the classic “sale” form
of an asset acquisition for cash. See Pinellas Ice, 287
U.S. at 469-470. In distinguishing this transaction
from the other two, the Commissioner’s rulings are
neither discriminatory nor inconsistent.
3. Finally, petitioners contend (Br. 8-9, 30-38)
that there must be a way in which a stock S&L can
merge into a mutual S&L without adverse tax effects,
unless the Internal Revenue Code is to be judged
quixotic. Although some other courts seem to have
found this idea persuasive (see, e.g., Capital Savings
& Loan, 607 F.2d at 976), it is completely misguided.
ote fe lel
45
Nothing in the Internal Revenue Code suggests that
Congress ever recognized any imperative that stock-
holders be permitted to dispose of their stock for dol-
lar obligations without recognizing gain, or that cor-
porations be permitted to purchase assets for dollar
obligations and take a basis in those assets different
from their cost. Indeed, the legislative history demon-
strates Congress’s understanding that, “[i]n the case
of mergers or reorganizations of savings and loan
associations,” the outcome “depends on whether for
tax purposes the merger is characterized as a tax-
free reorganization or as a taxable sale.” ™ Congress
plainly recognized that an amalgamation of S&Ls
employing the mechanisms of merger is not neces-
sarily tax-free, and it is hard to imagine a transac-
tion more like a “sale” than this one.
In any event, even if petitioners’ idea were not mis-
guided, it has no application here. On the very day
of the merger involved in this case—July 1, 1976—
a provision of the National Housing Act (enacted
8S. Rep. 91-552, 91st Cong., 1st Sess. 168 (1969) (discuss-
ing Tax Reform Act of 1969, Pub. L. No. 91-172, § 482 (b),
83 Stat. 622). The provision the Senate Finance Committee
was discussing concerned restoration of a bad-debt reserve to
the acquired S&L’s income, a result that is mandated in the
case of a “sale” but not of a “reorganization.” The Committee
stated (S. Rep. 91-552, supra, at 169) that the provision was
intended to be declaratory of existing law, and was made ex-
plicit in order to avoid the necessity of taxpayers’ obtaining
advance IRS rulings to that effect. This provision is signifi-
cant here because it was, with respect to transactions occur-
ring after its effective date (July 11, 1969), a statutory codifi-
cation of the result reached as to pre-1969 facts in Home Sav-
ings & Loan Ass’n Vv. United States, 514 F.2d 1199 (9th Cir.),
cert. denied, 423 U.S. 1015 (1975), the decision which the
court of appeals in this case followed and applied. See Pet.
App. 25-31.
46
three years earlier)™ took effect, which for the first
time permitted a federal mutual savings and loan
association to convert into a stock form of ormaniza-
tion. See York v. Federal Home Loan Bank Board,
624 F.2d 495 (4th Cir. 1980). Had petitioners and
their fellow Commerce shareholders desired to effec-
tuate a reorganization, and exchange their Commerce
shares for stock rather than dollars, it would have
been possible to convert Citizens into a stock associa-
tion and proceed with a reorganization on which no
gain would have been recognized.” In that event, of
course, petitioners would not have been able to cash
out their equity investment, but that is not something
that the Code’s reorganization provisions were de-
signed to permit them to do tax-free.
™ Pub. L. No. 93-100, $ 4, &87 Stat. 348, adding 12 U.S.C.
1725(j).
85 The Bank Board’s regulations governing applications for
permission to convert from a mutual to a stock form of fed-
erallv-chartered savings and loan association are set forth at
12 C.F_R. 552.1, 552.2 (1976). These regulations were promul-
gated on May 14, 1975 (40 Fed. Reg. 20945), in ample time to
have permitted Citizens to apply for conversion before the
July 1, 1976, effective date of the merger.
47
CONCLUSION
The judgment of the court of appeals should be
affirmed.
Respectfully submitted.
REX E. LEE
Solicitor General
ROGER M. OLSEN
Acting Assistant Attorney General
ALBERT G. LAUBER, JR.
Assistant to the Solicitor General
ERNEST J. BROWN
KENNETH L. GREENE
Attorneys
AUGUST 1984
wat aw ewe BO >
la
APPENDIX
(Statutes as effective in 1976)
INTERNAL REVENUE CODE OF 1954 (26 U.S.C.):
Sec. 116. Partial exclusion of dividends received by
individuals.
(a) Exclusion from gross income.
Gross income does not include amounts received by
an individual as dividends from domestic corpora-
tions, to the extent that the dividends do not exceed
$100. If the dividends received in a taxable year
exceed $100, the exclusion provided by the preceding
sentence shall apply to the dividends first received in
such year.
* * * * *
(c) Special rules for certain distributions.
For purposes for subsection (a)—
(1) Any amount allowed as a deduction under
section 591 (relating to deduction for dividends
paid by mutual savings banks, etc.) shall not be
treated as a dividend.
* * * * *
Sec. 354. Exchanges of stock and securities in cer-
tain reorganizations.
(a) General rule.
(1) In general
No gain or loss shall be recognized if stock or
securities in a corporation a party to a reorgan-
ization are, in pursuance of the plan of reorgan-
ization, exchanged solely for stock or securities
in such corporation or in another corporation a
party to the reorganization.
(2) Limitation
Paragraph (1) shall not apply if—
(A) the principal amount of any such
securities received exceeds the principal
amount of any such securities surrendered,
or
(B) any such securities are received and
no such securities are surrendered.
* * * * *
See. 356. Receipt of additional consideration.
(a) Gain on exchanges.
(1) Recognition of gain
If—
(A) section 354 or 355 would apply to
an exchange but for the fact that
(B) the property received in the ex-
change consists not only of property per-
mitted by section 354 or 355 to be received
without the recognition of gain but also of
other property or money,
then the gain, if any, to the recipient shall be
recognized, but in an amount not in excess of the
sum of such money and the fair market value of
such other property.
» * = * >
(d) Securities as other property.
For purposes of this section—
(1) In general
Except as provided in paragraph (2), the
term “other property” includes securities.
3a
(2) Exceptions
(A) Securities with respect to which
nonrecognition of gain would be permitted
The term “other property” does not in-
clude securities to the extent that, under
section 354 or 355, such securities would be
permitted to be received without the recog-
nition of gain.
(B) Greater principal amount in section
354 exchange
If—
(i) in an exchange described in sec-
tion 354 (other than subsection (c) or
(d) thereof), securities of a corpora-
tion a party to the reorganization are
surrendered and securities of any cor-
poration a party to the reorganization
are received, and
(ii) the principal amount of such
securities received exceeds the principal
amount of such securities surrendered,
then, with respect to such securities re-
ceived, the term “other property” means
only the fair market value of such excess.
For purposes of this subparagraph and sub-
paragraph (c) if no securities are surren-
dered, the excess shall be the entire princi-
pal amount of the securities received.
da
See. 368. Definitions relating to corporate reor-
ganizations.
(a) Reorganization.
(1) In general
For purposes of parts T and I and this part,
the term “reorganization” means—
(A) a statutory merger or consolidation ;
*
* * * *
See. 581. Definition of bank.
For purposes of sections 582 and 584, the term
“bank” means a bank or trust company incorporated
and doing business under the laws of the United
States (including laws relating to the District of Co-
lumbia) or of any State, a substantial part of the
business of which consists of receiving deposits and
making loans and discounts, or of exercising fiduci-
ary powers similar to those permitted to national
banks under authority of the Comptroller of the Cur-
reney. and which is subject by law to supervision and
examination by State, Territorial, or Federal au-
thority having supervision over banking institutions.
Such term also means a domestic building and loan
association.
Sec. 591. Deduction for dividends paid on deposits.
In the case of mutual savings banks, cooperative
banks. and domestic building and loan associations
and other savings institutions chartered and super-
vised as savings and loan or similar associations un-
der Federal or State law, there shall be allowed as
deductions in computing taxable income amounts paid
to. or credited to the accounts of, depositors or hold-
ers of accounts as dividends or interest on their de-
ade a
5a
posits or withdrawable accounts, if such amounts
paid or credited are withdrawable on demand sub-
ject only to customary notice of intention to with-
draw.
Sec. 593. Reserves for losses on loans.
* * * * *
(e) Distribution to shareholders.
(1) Jn general
For purposes of this chapter, any distribution
of property (as defined in section 317(a)) by a
domestic building and loan association to a
shareholder with respect to its stock, if such dis-
tribution is not allowable as a deduction under
section 591, shall be treated as made—
(A) first out of its earnings and profits
accumulated in taxable years beginning
after December 31, 1951, to the extent
thereof,
(B) then out of the reserve for losses on
qualifying rea! property loans, to the ex-
tent additions to such reserve exceed the
additions which would have been allowed
under subsection (b) (4),
(C) then out of the supplemental reserve
for losses on loans, to the extent thereof,
(D) then out of such other accounts as
may be proper.
This paragraph shall apply in the case of any
distribution in redemption of stock or in partial
or complete liquidation of the association, except
that any such distribution shall be treated as
made first out of the amount referred to in sub-
paragraph (B), second out of the amount re-
6a
ferred to in subparagraph (C), third out of the
amount referred to in subparagraph (A), and
then out of such other accounts as may be
7a
(C) at least 60 percent of the amount of
the total assets of which (at the close of the
taxable year) consists of—
proper. This paragraph shall not apply to any
transaction to which section 38) (relating to
carryovers in certain corporates acquisitions )
applies.
* * * * *
Sec, 1002. Recognition of gain or loss.
Except as otherwise provided in this subtitle, on
the sale or exchange of property the entire amount of
the gain or loss, determined under section 1001, shall
be recognized.
See. 7701. Definitions.
(a) When used in this title, where not otherwise
distinctly expressed or manifestly incompatible with
the intent thereof—
* * * * *
(19) Domestic building and loan association
The term “domestic building and loan asso-
ciation” means a domestic building and loan as-
sociation, a domestic savings and loan associa-
tion, and a Federal savings and loan associa-
tion—
(A) which either (i) is an insured in-
stitution within the meaning of section
401(a) of the National Housing Act (12
U.S.C., sec. 1724(a)), or (ii) is subject by
law to supervision and examination by State
or Federal authority having supervision
over such associations ;
(B) the business of which consists prin-
cipally of acquiring the savings of the public
and investing in loans; and
(i) cash,
(ii) obligations of the United States
or of a State or political subdivision
thereof, and stock or obligations of a
corporation which is an instrumentality
of the United States or of a State or
political subdivision thereof, but not in-
cluding obligations the interest of which
is excludable from gross income under
section 103,
(iii) certificates of deposit in, or ob-
ligations of, a corporation organized
under a State law which specifically au-
thorizes such corporation to insure the
deposits or share accounts of member
associations,
(iv) loans secured by a deposit or
share of a member,
(v) loans (including redeemable
ground rents, as defined in section
1055) secured by an interest in real
property which is (or, from the pro-
ceeds of the loan, will become) resi-
dential real property or real property
used primarily for church purposes,
loans made for the improvement of resi-
dential real property or real property
used primarily for church purposes,
provided that for purposes of this
clause, residential real property shall
include single or multifamily dwellings,
facilities in residential developments
8a
dedicated to public use or property used
on a nonprofit basis for residents, and
mobile homes not used on a transient
basis,
(vi) loans secured by an interest in
real property located within an urban
renewal area to be developed for pre-
dominantly residential use under an
urban renewal plan approved by the
Secretary of Housing and Urban De-
velopment under part A or part B of
title I of the Housing Act of 1949, as
amended, or located within any area
covered by a program eligible for as-
sistance under section 103 of the Dem-
onstration Cities and Metropolitan De-
velopment Act of 1966, as amended, and
loans made for the improvement of any
such real property,
(vii) ioans secured by an interest in
educational, health, ov welfare institu-
tions or facilities, including structures
designed or used primarily for resi-
dential purposes for students, residents,
and persons under care, employees, or
members of the staff of such institu-
tions or facilities,
(viii) property acquired through the
liquidation of defaulted loans described
in clause (v), (vi), or (vii),
(ix) loans made for the payment of
expenses of college or university educa-
tion or vocational training, in accord-
ance with such regulations as may be
prescribed by the Secretary, and
—— eee: —
9a
(x) property used by the association
in the conduct of the business describea
in subparagraph (B).
At the election of the taxpayer, the percent-
age specified in this subparagraph shall be
applied on the basis of the average assets
outstanding during the taxable year, in lieu
of the close of the taxable year, computed
under regulations prescribed by the Secre-
tary. For purposes of clause (v), if a multi-
family structure securing a loan is used in
part for nonresidential purposes, the entire
loan is deemed a residentia! real property
loan if the planned residential use exceeds
80 percent of the property’s planned use
(determined as of the time the loan is
made). For purposes of clause (v), loans
made to finance the acquisition or develop-
ment cf land shall be deemed to be loans
secured by an interest in residential real
property if, under regulations prescribed by
the Secretary, there is reasonable assurance
that the property will become residential
real property within a period of 3 years
from the date of acquisition of such land;
but this sentence shall not apply for any
taxable year unless, within such 3-year
period, such land becomes residential real
property.
* * x * x
10a
12 U.S.C. (1976 ed.) :
Sec, 1464. Federal Savings and Loan Associations.
(a) Organization authorized.
In order to provide local mutual thrift institutions
in which people may invest their funds and in order
to provide for the financing of homes, the Board is
authorized, under such rules and regulations as it
may prescribe, to provide for the organization, in-
corporation, examination, operation, and regulation
of associations to be known as “Federal Savings and
Loan Associations,” and to issue charters therefor,
giving primary consideration to the best practices of
local mutual thrift and home-financing institutions in
the United States.
(b) Capital; members of the association; voting
rights; payment of savings accounts and withdrawals ;
nontransferable order or authorizations; authoriza-
tion to borrow, give security, act as surety, and issue
notes, bonds, debentures, or other obligations.
(1) An association may raise capital in the
form of such savings deposits, shares, or other
accounts, for fixed, minimum, or indefinite pe-
riods of time (all of which are referred to in this
section as savings accounts and all of which shall
have the same priority upon liquidation) as are
authorized by its charter or by regulations of the
Board, and may issue such passbooks, time cer-
tificates of deposit, or other evidence of savings
accounts as are so authorized. Holders of sav-
ings accounts and obligors of an association shall,
to such extent as may be provided by its charter
or by regulations of the Board, be members of
the association, and shall have such voting rights
and such other rights as are thereby provided.
Except as may be otherwise authorized by the
lla
association’s charter or regulation of the Board
in the case of savings accounts for fixed or mini-
mum terms of not less than thirty days, the
payment of any savings account shall be subject
to the right of the association to require such
advance notice, not less than thirty days, as shall
be provided for by the charter of the association
or the regulations of the Board. The payment of
withdrawals from savings accounts in the event
an association does not pay all withdrawals in
full (subject to the right of the association to
require notice) shall be subject to such rules and
procedures as may be prescribed by the associa-
tion’s charter or by regulation of the Board, but
any association which, except as authorized in
writing by the Board, fails to make full payment
of any withdrawal when due shall be deemed to
be in an unsafe or unsound condition to transact
business within the meaning of subsection (d) of
this section. Savings accounts shall not be sub-
ject to check or to withdrawal or transfer on
negotiable or transferable order or authorization
to the association, but the Board may by regula-
tion provide for withdrawal or transfer of
savings accounts upon nontransferable order or
authorization.
(2) To such extent as the Board may authorize
by regulation or advice in writing, an association
may borrow, may give security, may be surety
as defined by the Board and may issue such
notes, bonds, debentures, or other obligations, or
other securities (except capital stock) as the
Board may so authorize.
* - * * *
® wv. S. Government printing orice; 1964 421823 10021
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.